Does Fiscal Consolidation Affect Non-Performing Loans? Global Evidence from Heavily Indebted Countries (HICs)

Round 1

Reviewer 1 Report

This paper investigates whether fiscal consolidation episodes affect non-performing loans in heavily indebted countries. It concludes that fiscal consolidation measures increase NPLs.

In general, I find the idea of investigating whether fiscal policy measures affect NPLs worth studying and with potential important implications for macro-prudential policy.

I consider the paper to be in its early stages and I would have a number of areas in which I consider that clarifications and improvements are necessary before going forward:

1.     1. In general factors affecting NPLs are of macroeconomic nature. GDP dynamics is usually the main variable found to be relevant in the evolution of NPLs. How do you separate fiscal policy and GDP growth? Is there a mechanism trough which fiscal policy affects NPLs except for its impact on economic growth? If so, it has to be highlighted. If not, the impact of fiscal policy on NPLs has to be studied through its impact on GDP. In fact, the only reference related to a similar study is represented by a working paper.

2.     2. Why study only the impact of fiscal consolidation on NPLs and not the impact of change in fiscal policy stance like change in CABB? Is there a different effect on NPLs during fiscal consolidations compared to fiscal expansions?

3.     3. Why choose only highly indebted countries? What makes them different in relation to the current study compared to lower indebted countries? How to say that a country is highly indebted? Different countries have different levels of development.

4.    4.  Why do you mean ”improves the NPL rate by 28.55 pp”. Do you mean it increases by 28.55 percentage points? This result is quite striking. It would mean that strong fiscal consolidation episodes have a drastic impact on NPLs. This result is not observed in practice.

5.     5. What about implications of the results on policymakers?

I consider that many aspects have to be sorted out more thoroughly. One critical aspect is dealing with endogeneity issues between fiscal policy and economic growth.

English language is fine.

Author Response

Many thanks for your helpful feedback.  Our responses are included in the file attached.

Author Response File: Author Response.pdf

Reviewer 2 Report

Excellent piece of work on "Does Fiscal Consolidation Affect Non-Performing Loans? 2 Global Evidence from Heavily Indebted Countries (HICS)"! The study is interesting but needs to showcase its merit by improving the following areas:

i. In the introduction section, it flaws to tie with the theories. So, it is highly desirable to receive the potential benefits of the outcome of the study (based on theoretical and empirical context).

ii. Only using more countries' datasets is not enough to contribute to the existing literature. Hence, the author should magnify the contributions in the study. 

iii. The citation should be more rigorous with the discipline and need to update citations.

iv. In methodology, you should place a section for only data by addressing data size, selection technique, sample nature, etc. Moreover, it is also expected to extend from its current data size. 

v. The authors delved to analyze robustness only by replacing variables, but here, we expect to see the validity of basic models through other instrumental approaches or estimation. and,

vi. Share the link of data in the acknowledgement section for the aftermath of the analysis based on the updated dataset to make visible its credentials. 

 

 

Good

Author Response

Many thanks for your helpful feedback.  Our responses are included in the file attached.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

The authors provided adequate responses to my observations.